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SECURE Act 2.0 Finally Passes

It’s hard to believe it’s been a year and a half since I wrote about a proposed new retirement savings bill with significant bipartisan support. I mentioned in the article that Congress had its hands full, and it might get pushed off to 2022. However, I didn’t think it would take until late December when it was finally passed as the “Consolidated Appropriations Act of 2023”. Many of the original provisions I discussed in that article made it into the final bill, with some edits and new items. Here’s a summary of the big changes that might impact you.

Start Date for Required Minimum Distributions (RMD) Pushed Back Again

The original Secure Act passed in December 2019 pushed back the age when the IRS requires you to start taking annual withdrawals from your retirement accounts from 70.5 to 72. Starting in 2023, that age is now 73, and it will further increase to age 75 in 2033. Here’s a summary of how this impacts you based on your year of birth:

  • 1950 or earlier - You have already started your RMDs, so there is no change.
  • 1951-1959 - You will start taking RMDs when you turn 73.
  • 1960 or later - You will start taking RMDs when you turn 75.

While this might seem like a small change, if you don’t need the distributions from your retirement account to live on, this gives you additional time to implement tax planning opportunities like Roth conversions. It also gives the IRA and 401(k) account owners the ability to let their investments continue to compound tax-free for a longer period of time.

529-to-Roth IRA Transfers

A new provision that was added to the final version of the bill is the option to move money directly from a 529 account to a Roth IRA. While this is a nice addition that will comfort some people worried about overfunding a 529 account, there are quite a few limitations:

  • The maximum lifetime amount that can be moved is $35,000, and it is subject to the same annual IRA limit that a regular contribution would be.
  • The Roth IRA must be in the name of the beneficiary of the plan. 
  • The plan must have been maintained for fifteen years or longer
  • Any contributions made to the plan in the last five years are ineligible.

While we will need clarification on some aspects of this rule, if you have leftover 529 funds for your child or grandchild or you expect you will have leftover funds, you should be thinking about this. If you want that money to stay with the child, rolling it into a Roth IRA after they graduate and start work might be a great option.

More Roth Changes

In addition to the new 529 to Roth distribution option, the legislation made several other changes to Roth accounts: 

  • Under current law, even though Roth IRAs are NOT subject to required minimum distributions, Roth retirement plans, like a Roth 401(k) or a Roth 403(b), are. Starting in 2024, these different types of accounts will be on equal footing as no Roth accounts will be subject to Required Minimum Distribution.
  • While Roth IRAs have now been around for some time, the new bill will now also allow taxpayers to create SIMPLE and SEP Roth IRAs as well, beginning January 1, 2023.
  • Under current law, any employer matching contributions to qualified retirement plans must be made to a regular pre-tax account, even if the plan offers a Roth option. Starting in 2023, employers can deposit those matching contributions into a designated Roth account. However, the amount deposited would be included in the employee’s income in the year of distribution.

Qualified Charitable Distributions

We have helped many clients take advantage of Qualified Charitable Distributions (QCDs) in recent years. A QCD is a direct charitable contribution from a retirement account for anyone over 70.5. Any amounts donated directly to charity are not included as income, so if you are subject to annual required minimum distributions, this is a way to reduce your taxable income. The annual limit for QCDs has been $100,000 since they were introduced 15 years ago, but they will now be indexed for inflation starting in 2024. That means we’ll finally see an increase in the maximum amount next year.

Retirement Plan Catch-Up Contributions

Starting in 2024, IRA catch-up contributions will finally be indexed to inflation. The catch-up contribution limit, which applies to taxpayers 50 and older, has been set at $1,000 since 2006, so this is a long overdue change. 

Starting in 2025, employer retirement plan catch-up contributions will also be increased for certain plan participants. Individuals who are ages 60-63 years old will be able to make contributions of up to $10,000 OR 150% of the regular catchup contribution annually, and that amount will be indexed to inflation. The current catch-up limit of $7,500 looks to stay in place for anyone over 50 who is not ages 60-63. So yes, once you hit 64, the catch-up contribution limit returns to the normal amount again. 

In case you weren’t confused yet, individuals over 50, who earned more than $145,000 in wages in the prior calendar year, will need to make all their catch-up contributions to a Roth account using after-tax dollars. 

RMD Penalty Relief

Missing your required minimum distribution has long been subject to an excessive 50% penalty. The new legislation drops that penalty to 25% and opens up a “correction window” where the taxpayer can rectify the missed RMD and only be subject to a 10% penalty. In practice, we’ve generally seen the IRS be very lenient in abating any missed RMD penalties, especially if it was a first-time offense. Presumably, you’d still be able to apply for such abatement, but given the reduced penalty amounts, the IRS might take a less lenient stance here.

Other Stuff

There is a LOT more in this bill than what I’ve outlined above; however, we won’t get into all the details. Here are a few highlights of other items that might impact some people:

  • New exceptions to the 10% penalty for early retirement distributions.
  • New option for surviving spouse beneficiaries of retirement accounts to be treated as the deceased spouse for RMD purposes.
  • Increase in QLAC option in retirement accounts to $200k and repeals the 25% of account-balance limitation
  • Expanded access to ABLE accounts for those who become disabled before age 46 instead of 26.

If you want to dig into more details on the bill, this article from Jeff Levine at Kitces.com is an excellent starting point. If you’d like to discuss how some of these changes might impact you, feel free to reach out to schedule a time when we can discuss.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures for more information.